Over the past several months, countless stock market pundits have told investors that they should add to their stock portfolios because, they contend, "stocks are cheap."
My experience suggests that these so-called "analysts" and money managers have been basing their comments and recommendations on recent declines in price-to-earnings ratios (P/E ratios), which have fallen due to the pullback in stock prices (the "p" in the price-to-earnings ratio) over the past few months.
For example, the P/E ratio for the S&P 500 Index fell to 18.3 as of Wednesday's close from a recent high of 19.1, as a result of a 7.5 percent decline in the price of the S&P 500. Over the past 10 years, the P/E ratio for the S&P 500 Index averaged 28.6.
As usual, these so-called "experts" have apparently been paying more attention to historical corporate earnings, rather than bothering to determine the magnitude of corporate profits in the quarters ahead.
Hence, the opinions expressed by these analysts and money managers are essentially useless. Actually, their comments are worse than useless, because my models indicate that investors who follow the advice rendered by these self-serving Wall Street "experts" will likely see the gains they realized over the past couple of years evaporate in the months ahead.
The following example clearly exposes the rear-view mirror mentality of most Wall Street analysts. Last October, they were projecting corporate profits for companies that comprise the S&P 500 to rise by 11.5 percent during the fourth quarter of 2007 (compared to the same quarter a year ago).
Those same analysts now — after the fact — estimate that corporate profits fell by 6.1 percent during the fourth quarter.
My own research indicates that corporate profits for S&P 500 companies fell approximately 6.4 percent during Q4 2007, and that corporate profits will continue to fall during the next two quarters.
I therefore expect stock prices to fall sharply over the next few months. But, the choice is yours — listen to the Wall Street experts and lose money, or try our investment newsletter and make money during both good and bad times.
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